The European Commission has stepped in to block the accounting methods the Italian government had been planning to use to calculate its budget deficit.

The move is likely to mean that Italy will have to own up to a much bigger difference between the amount of money it spends, and the amount it collects in tax.

Italy had been hoping to declare a budget deficit for 2001 of around 1.6% of the country's total economic output.

In fact, the figure is likely to be nearer 2.1%, dangerously close to the 3% level where the EU - under rule agreed with the introduction of the euro - would be obliged to hand out a range of punishments, starting with a heavy fine.

Balancing the books

The latest predicted rise has been prompted by a ruling by EU regulators.

What Enron did was to use off-balance items and future receipts; we don't want that in public finances

Eurostat director Yves Franchet

Countries which have signed up to the single European currency are obliged to try to balance their budgets. Those that do not will have to resort to borrowing to make up the shortfall.

Italy's budget deficit projection was on the low side because it included $7.5bn from sales of government property which have not yet found buyers.

It also counts on earnings from the country's national lottery from draws which have yet to take place.

Unrivalled scrutiny

Officials at Eurostat, the European Commission's statistical department are not impressed.

In an interview with the Financial Times newspaper, Eurostat director Yves Franchet compares Italy's accounting techniques with methods revealed through corporate scandals in the US.

"What Enron did was to use off-balance items and future receipts; we don't want that in public finances," he said.

Despite this latest row, the commission insists that the Stability Pact, in which budget deficit rules are enshrined, remains in good shape.

The commission says that the independent scrutiny which the accounts of EU countries are subjected to is unrivalled.